UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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THE INTIMATE BOOKSHOP, INC., : 98 Civ. 5564 (WHP)
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Plaintiff, :
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-against- :
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BARNES & NOBLE, INC.; :
BARNESANDNOBLE.COM INC.; :
BORDERS GROUP, INC.; BORDERS, INC.; and :
WALDEN ACQUISITION COMPANY; :
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Defendants. :
:
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DECLARATION OF WALLACE H. KURALT IN OPPOSITION
TO DEFENDANTS' JOINT SUMMARY JUDGMENT MOTION
WALLACE H. KURALT hereby declares, pursuant to the penalties of perjury under 28 U.S.C. Section 1746, that the following statements are true and correct:
1. I am the president of the plaintiff, The Intimate Bookshop, Inc. ("Intimate"), am fully familiar with the facts stated herein, and make this declaration in opposition to defendants' joint summary judgment motion.
2. Annexed as Exhibit A to the accompanying Person Declaration is a copy of my expert report dated July 31, 2001 together with Appendices A through I. All statements of fact in the report are true and accurate, and all statements of opinion continue to be my opinion, and I am willing to testify to such facts and opinion if called upon to testify at trial.
3. Intimate was founded in 1931, and I went to work for it in 1958, and purchased the bookstore in 1965, when there was only a single store.
4. From 1965 to the time that defendants opened up their first Barnes & Noble ("B&N") and Borders stores, Intimate was able to grow in sales from about $100,000 per year in 1965 to about $10,300,000 in fiscal 1994, year ending 3/31/94.
5. The competition for Intimate during this period before the superstores was mainly from other independent bookstores (such as Little Professor, and the Book Exchange), small mall bookstores (such as B. Dalton, Waldenbooks and Wills), and non-bookstores carrying bestselling trade books and paperbacks (such as Wal-Mart, Sam's Club, and K-Mart).
6. During this period, Intimate was able to grow in sales and profits while competing with these bookselling competitors, and Intimate maintained its market share of about 1/10 of 1% of all books sold by ABA members in the United States. These ABA statistics probably did not include book sales by non-members such as Wal-Mart and K-Mart.
Intimate and Other Non-Superstore Bookstores WERE Adversely Affected
7. It was only with the opening up of book superstores, starting in the early 1990's, by defendants B&N and Borders, as well as by superstore chain Books-a-Million ("BAM") that Intimate was adversely affected. Media Play also sold books at discounts, but was more like Wal-Mart because it did not sell books as its primary business. Also, Media Play's stores were more distant than defendants' 17 superstores except for 1 (in Raleigh).
8. Not only was Intimate adversely affected, but the whole independent bookselling industry, as well as the small mall-bookstore chains (B. Dalton and Waldenbooks, owned by B&N and Borders), among others, were adversely effected. All of the non-superstore general booksellers such as Intimate were adversely affected.
Intimate's Reaction to Superstores
9. Intimate and other independent booksellers in the industry did not know what was happening to us. We believed that B&N and Borders were paying the same price for books that we were paying and did not understand how they could operate their superstore businesses with the discounts which Intimate and other independent bookstores (as published in the ABA Buyer's Manual, known to all as "the Redbook") were receiving. As a result of this lack of understanding of the problem, Intimate tried to compete (unsuccessfully) by various activities, most of which were costly and resulted in the loss of profit margin and/or loss of sales, and loss of net profits.
10. I observed that immediately prior to and during their opening of superstores in direct competition with Intimate, B&N and Borders both advertised extensively in local radio, television and newspapers and obtained extensive publicity, announcing that prospective customers could purchase books at 10% to 20% off of the published retail price and books on the hardcover bestseller list at 30% to 40% off of the published list price.
11. Discounts of this amount were beyond the ability of Intimate to provide, because we would have been left with insufficient profit margin to operate our business. Thus, we could not match defendants in price, without being driven out of business. Also, we could not compete by offering higher quality of product because we were selling the same books that defendants were selling, with some exceptions of course. Defendants sold all the books appearing on the New York Times bestseller lists, as did Intimate.
12. One thing Intimate did was to spend a substantial amount of time and money developing a discount club for our customers, in which they could become members upon payment of a $10 membership fee per year, which would entitle them to purchase books from Intimate at a 10% discount (or 30% as to bestsellers). All other customers were given a 10% discount on bestsellers. Intimate obtained about 8,000 members (for annual membership revenues of about $80,000), and gave up about $250,000 annually in profit margin as to book purchases made by club members. The annual cost of creating and administering the program was approximately $25,000-$50,000, including postage, data processing, direct mailings, and other administrative time devoted to the activity. The program slowed but was not able to stop Intimate's loss of sales, and resulted in a drop in Intimate's profit margins.
13. Also, Intimate started to increase its advertising to try to attract customers being lost to defendants. Intimate increased its advertising until 1996. By this time, very little of this advertising was reimbursed by book publishers, because their coop advertising programs were becoming increasingly unusable because of restrictions placed by the Publishers on their use by independents.
14. I observed that defendants' superstores had more space, more titles, better (more expensive) locations, more amenities (including a place to eat, drink and read books and magazines without buying them; public bathrooms for patrons and others; chairs scattered around the superstores for persons to read books and do their homework or research similar to a library, without fear of being asked to leave the store; parking adjacent to the superstores and allocated solely for use of the superstore and its customers), and of course defendants had lower prices.
15. There seemed to be little that Intimate could do to offset these amenities described in the preceding paragraph. We did not have the gross profit margin to pay for such amenities, and wondered how defendants could afford such amenities with the Red Book discount which I and others in the industry believed defendants were paying for their book inventory. It was widely publicized in the industry that Leonard Riggio, C.E.O. of B&N, denied getting any different book prices than available to Intimate and others in the industry. We wondered how this could be the case, and started to believe that defendants must be obtaining better prices to be able to spend what they were spending to differentiate their businesses from Intimate and other independent booksellers.
16. Intimate tried to find ways to keep its existing customers, but I saw that we were losing many of them to defendants. We always tried to provide better service, and were willing to make special orders for books which we (and usually defendants likewise) did not carry. Defendants were not as anxious to take the time to help customers put in special orders for books, but this did not seem to help our sales to any appreciable extent.
17. Due to this competition, we had to close our first of nine existing stores, and to do this we had to pay off the landlord to settle our lease obligations; also, we had other closing expenses. Each store in turn, as we closed it had various closing expenses. The total expense for paying off landlords is set forth below; also, we had litigation expenses relating to leases; and there were closing expenses for the costs of returning inventory; losses on books which were not returnable; loss on selling books at less than cost; dismantling of fixtures costs; cleaning the stores "broom clean" for each of the store closings; termination payments to employees; and hiring of temporary employees to assist in closings.
18. Intimate had to throw away bookstore fixtures. These fixtures for the most part had been depreciated on Intimate's books, but were valuable assets which had to be discarded; and upon opening of new stores (if Intimate prevails in this litigation) will have to be repurchased and reinstalled.
19. Intimate's employees were trained during a 6-month period to provide high quality bookstore service, and the cost of such loss can be approximated at about $5,000 per employee, for a total of 140 employees (for 9 stores), or a total of $700,000, not including me or my wife, Brenda Kuralt.
20. The activities of defendants caused Intimate to have litigation with various suppliers for unpaid merchandise (because of Intimate's deteriorating financial condition), not including payments to the publishers or wholesalers in settlement of the litigations.
21. I recognized that Intimate was losing customers to defendants (and BAM) because the volume of our sales of bestsellers declined at the time of the defendants' openings of their superstores, and kept declining.
22. From time to time I saw customers in Intimate's stores who were carrying bags known to me to be used by defendants to bag the books purchased by defendants' customers.
23. Also, many of Intimate's customers told me that they were buying books at B&N and Borders because their prices were lower, and suggested that Intimate should lower its prices to meet this price competition of defendants. I explained to no fewer than 25 of these customers that we could not stay in business if we sold books at the same prices as defendants were selling books for at the time. One of these persons was Professor Kaplan of the Dept. of Psychiatry of the University of North Carolina who told me, as soon as Barnes & Noble opened in Chapel Hill (1996) that he wanted to be loyal to us, after all these years, but that he could not stand there and buy a book from us for $5.00 more than he could buy the same book at Barnes & Noble just up the road. Other persons included an art teacher who bought books for her students to look at; an advertising director who bought books for himself and his staff library.
24. Starting immediately upon the opening of each new superstore by defendants within Intimate's marketing area, I noticed a decline in sales, a reduction in customers, a marked decline in sales of bestsellers, and a failure to see certain customers who I had been accustomed to seeing in Intimate's Chapel Hill bookstore where I had my office.
25. Intimate employees reported to me that they were seeing fewer customers, a reduction in sales, loss of identifiable customers, and customer dissatisfaction with Intimate's higher prices starting within several days or weeks after defendants' superstore openings, and continuing thereafter.
26. Also, various employees of Intimate reported to me that they had spoken with Intimate customers who told them the same thing, that they were buying books at B&N and Borders because they could be purchased less expensively there.
27. Also, when I visted B&N and Borders (both Charlotte stores, and the Greensboro Borders) competing stores from time to time (starting in the early 1990's), I saw (but did not speak with) various customers or former customers of Intimate, and was told by Eric Svenson, Intimate VP, that he observed some of his customers purchasing books at the checkout counter of B&N and Borders.
28. Also, defendants were able to acquire a location being used by Intimate, by offering the landlord a better lease agreement (for whatever reasons), which cost Intimate about $100,000 in closing and relocation expenses.
29. The book-club membership survey conducted by Intimate's expert Bruce Kardon (an exhibit to the accompanying Person declaration) shows that Intimate's book club members started buying books at B&N and Borders to the extent of 95%, which demonstrates how Intimate's customers migrated to defendants' superstores and caused Intimate to close its various stores, one by one.
30. Intimate lost sales upon the opening of each of defendants' 17 superstores in the area.
31. Intimate's book purchases and other dealings with the 14 Publishers listed in paragraph 30-K in the 2nd Amended Complaint (the "14 Publishers", not including Abrams) starting in the early 1990's to the date of closing of the last of Intimate's stores are summarized as follows:
A. Purchase of hardcover and paperback trade books, mass-market paperbacks and audio books at the discount from publisher's list price as set forth in the ABA Red Book (or for any rate revisions, at the next rate published in the ABA Red Book).
B. Return privileges as set forth in the ABA Red Book (or for any return revisions, at the next return terms published in the ABA Red Book).
C. No cash discount, except as to one of the 14 Publishers (Random House, 2% if paid by 10 days after end of month, called "1/10 EOM and net 30").
D. No Regional Distribution Center (RDC) discount, and no portion of any RDC discount for purchasing in accordance with some of the Publisher's RDC requirements.
E. No Return Center (RC) discount, for returning books to any of the 14 Publishers from a single return center.
F. No end-cap, table or other display allowances.
G. No pocket allowances or rack allowances.
H. No advertising or promotional allowance which could be earned without making actual cash expenditures, proving these actual cash expenditures to the Publisher, and then waiting for the Publisher to issue a credit to Intimate.
I. No advertising or promotional allowance which could be used to advertise books which did not create the allowance.
J. No advertising or promotional allowance which could be used to advertise books in areas of the United States which did not create the allowance or in areas in which defendants' competitors were strongest.
K. No statistical reserve credits (based on an assumed shipping error rate) which replaced the need to prove the precise dollar amount of each missing or damaged book shipped by the Publisher.
L. No negotiation of additional payments, discounts, or benefits with the Publisher.
M. No continual deducting of claimed amounts and settling Publishers' invoices on a periodic basis for a substantial of the disputes created by defendants.
N. Termination of all shipments if Intimate did not pay all amounts invoiced by the Publishers to Intimate.
O. No Special deals, stock offers or markdowns in place which were not published and made available to all booksellers.
P. Requirement that Intimate to pay all outstanding invoices by a specified date.
Q. Rebates on freight not set forth in the Red Book and not offered otherwise to independent booksellers.
R. No free books.
S. No concessions or opening allowances on store openings or closings.
T. No fees for shipping errors by the Publishers.
U. No early book shipments.
V. No payments for information provided by the bookseller to the Publisher.
W. No fees charged to the Publisher for publisher shipping errors.
X. No instructions or conditions to the Publisher on how or when book shipments are to be made, including packaging, labeling, number of books per box.
Y. No no-cost inventory (i.e., paying the Publishers for books months after the books were resold by defendants to retail customers).
Z. Elimination of dating terms for Intimate and other independents because of financial crisis created for the 14 Publishers by the activities of defendants.
AA. Advertising and promotional allowances were based on the aggregate net purchase price of the book, with no allowances on returned books.
31A. Eighty-five percent of Intimate's purchases were made from the 14 Publishers.
32. The limitation by Publishers of Intimate to the discounts and terms described above while providing all of the above discounts, payments, and other benefits to defendants, created a massive disparity in price to Intimate for the same books being bought by Intimate and defendants. According to audited statements, Intimate essentially was receiving a discount of 42% on its book purchases (the Red Book rate) while defendants were receiving substantially higher effective discounts. [It should be noted that Intimate is not complaining about any difference in earned discounts at Red Book rates. Thus, when Intimate bought 10 copies of a book for a 42% discount, while B&N bought 100 copies and was invoiced 46%, the highest Red Book discount, Intimate is not complaining about that 4% difference.]
UNDERSTANDING DEFENDANTS' BOOK PRICES IS
COMPARABLE TO UNDERSTANDING A "DNA CODE"
33. Calculating the cost of books purchased by defendants is very difficult because of the numerous, various ways in which each of the Publishers provides discounts, compensation and other benefits to the defendants. These discounts, payments and other benefits to defendants are a secret "DNA code" applicable to each individual Publisher which has to be learned and applied to enable anyone (defendant, Publisher, Intimate, Court and jury) to understand the price at which defendants are buying their books from the 14 Publishers, in comparison to the average 42% at which Intimate was buying its books from the 14 Publishers.
34. Some of the components of "price" are set forth in my expert report (annexed as Exhibit A to the Person declaration) at pages 51-53.
2% RDC and 1% RC Fees Are in Excess of Publishers' Cost Savings
35. I incorporated by reference the facts set forth at pages 38-42 and 53-62 of my expert report (annexed as Exhibit A to the Person declaration).
36. For several years, ending approximately during 1995 and 1996, defendants were obtaining a secret RDC discount from all of the Publishers, even though the Red Books were not indicating that all Publishers were providing an RDC allowance. I was unaware of any such RDC discount program involving all Publishers until 1995 or 1996, but by that time, even if the RDC allowance theoretically was being offered to Intimate, it would still take a one-year period to prepare plaintiff's system, including software changes and physical plant changes, to convert to an RDC system to obtain the Publishers' RDC discount. The few Red Book disclosures about RDC allowances came as a result of the ABA's action in New York, but the Red Book disclosures generally imposed requirements including "qualifications" and "conditions". What the RDC';s were being given was not disclosed, except in some instances there was the disclosure of a 1% or 2% additional discount. This disclosure was false and misleading and failed to tell Intimate and other independent booksellers the full extent of discounts, fees, deductions, penalties, returns, delayed payment, freight rebates and other benefits being given to defendants through their unique RDC accounts.˙Accordingly, Intimate never was offered and never received any RDC discount or related Return Center (RC) discounts, fees, or other benefits as stated above.
37. To the extent that the Publishers' RDC and RC allowances required carton-quantity purchases, Intimate would have been able to take advantage of carton quantity book purchases for its chain of 9 stores, but no Publisher offered Intimate any part of the RDC and RC allowances for making carton-quantity purchases.
38. To the extent that the Publishers' RDC and RC allowances required a docking area for unloading truckload shipments, no Publisher offered Intimate any part of the RDC and RC allowances for taking shipments through Intimate's loading dock (located in 6 out of 9 Intimate bookstores: #1 downtown Chapel Hill NC; #2 South Park, Charlotte NC; #3 Eastland Mall, Charlotte NC; #5 Eastgate, Chapel Hill NC; #8 Winston-Salem NC; #10 in Greensboro NC).
39. To the extent that the Publishers' RDC and RC allowances required that Intimate have multiple stores being served by a RDC facility, no Publisher offered Intimate any part of the RDC and RC allowances for purchasing books centrally for reshipment by Intimate to multiple bookstores owned by Intimate.
40. To the extent that the Publishers' RDC and RC allowances required that Intimate have an independent warehouse building, no Publisher offered Intimate the RDC and RC allowance less an allocable amount for not having an independent warehouse building. Actually, however, Intimate did have an independent warehouse in Carrboro and another in Charlotte NC, both separate from the stores and both at all times during the 1990's; Intimate also a fork lift and pallete jacks. Intimate at all times had the facilities to obtain the RDC and RC fees, but they were never offered to Intimate.
41. Intimate was not offered any reduced RDC and RC allowances for unbundled components of the Publishers' various RDC and RC requirements at any time, which means that Intimate was not offered the opportunity to achieve similar benefits derived by defendants from the Publishers' RDC and RC programs.
42. If the RDC and RC programs were actually saving the Publishers money, as defendants claim, it seems wholly inconsistent that the Publishers did not want to enjoy such savings by giving proportionate RDC and RC opportunities to Intimate and other independents. Instead, it would appear that the Publishers were losing money on the RDC and RC allowances, which is why they only gave them (secretly) to defendants, and when finally announcing their RDC and RC terms, only made such terms available to a select few retail chains by imposing various conditions.
Intimate's Competition with Defendants
43. Within a very short period of time, defendants opened two new mall stores and some 17 superstores in the market areas service by Intimate -- most within a mile or so from Intimate's store(s), and several only a short walk away. These 17 superstores were the equivalent in size to about 150 typical "mall-size" bookshops, which is a formidable amount of competition designed to oversaturate the competitive area, drive the independents out of business, and enable defendants later to close down stores which are no longer necessary to drive out competition.
44. Exhibit A hereto is a copy of Intimate's answers to interrogatories in which Intimate supplied information about bookstores (including defendants' bookstores) competing with each of Intimate's stores while they were in existence). This information in Exhibit A is accurate except as follows: Intimate was also competing with non-bookstores selling bestselling books, such as Wal-Mart, Sam's Club and K-Mart (but such competition was being met successfully by Intimate, as explained above).
45. Factors which enter into "price" are set forth at pages 68-69 of my expert report (annexed as an exhibit to this declaration).
Defendants Were Aware that the Prices They
Received from the Publishers Were Discriminatory
46. The defendants had good reason to believe that the prices they received from each of the Publishers were discriminatory as to the independent booksellers:
A. Defendants purchased the assets of various bookstores (such as B. Dalton and Waldenbooks) and could see from their records that they were paying a higher price for books.
B. The B. Dalton and Waldenbooks mall bookstores, which Intimate competed with successfully, were also victims of the superstores.
C. Defendants were aware that a campaign of several months to take customers away from Intimate and other independent booksellers would cripple most independent bookstores and drive them out of business.
D. Defendants could not have known the price at which others were buying or selling books, and any representation to the contrary to Publishers would have been false; thus, defendants had no right seeking and obtaining expanded benefits based on any argument of "meeting competition". Also, I'm sure they did not take into account the enormous costs of taking back defendants' returns (sometimes 50% or more of the books purchased by defendants), which costs the Publishers did not incur with Intimate or the other independents, because we had developed and used purchasing systems which kept returns to a proper level.
E. Defendants are wrong in basing their RDC cost justification defense on the amounts they spend; the issue is what amount is saved by the Publisher as to functions taken over from them by the defendants' RDC's. See explanation above for further development of this RDC topic.
F. None of the benefits obtained by defendants was ever published in the Red Book for other booksellers to see and obtain (through 1997, at least), so that each advantage obtained by defendants was a secret and deliberately withheld from dissemination to the industry, and discriminatory as a result.
G. Defendants solicited, on an organized, recurring basis, the increased discounts, payments and other benefits, knowing at the same time that the independent booksellers were aware that as to them the Publishers discounts, payments and other benefits were non-negotiable, enforced by refusals to ship upon non-payment of the Publisher's invoices sent out with Red-Book rates and terms.
H. Defendants put financial pressure on the Publishers which required that they charge more to Intimate and other independents to be able to show any profits in their publishing field, and this required the Publishers to increase their book prices to all, which Intimate and other independent had to pay in cash, while defendants were not paying for books at all until after they had been sold (by returning books for credit instead of keeping them as inventory) by the time defendants finally decided to pay for the books they had ordered. Defendants could discount the higher prices (by offering lower prices and higher quality of customer-pleasing services), while Intimate could not, resulting in loss of sales for Intimate.
Intimate's Purchases of Books Were in Interstate Commerce
47. None of the 14 Publishers has or had any warehouse in North Carolina or South Carolina during 1990-1998, so that all of Intimate's purchases of books from the 14 Publishers were made in interstate commerce. The same is true as to each of defendants' stores in competition with Intimate's stores. Each of defendants' stores or the RDC's servicing such stores, bought all of its books from the 14 Publishers in interstate commerce.
The Quality of the Books Purchased by Defendants and Intimate Was the Same
48. Intimate and defendants superstores were purchasing the same type of books, except that defendants had a more extensive selection. Most of the books carried by Intimate were carried by defendants, including all hardcover fiction bestsellers, hardcover non-fiction bestsellers, hardcover fiction bestsellers, and paperback non-fiction bestsellers. Also, defendants and Intimate carried Idiot and Dummies books, children's books, juvenile books, test preparation books, classic books, and many others.
Defendants' Activities Put Intimate Out of Business
49. I incorporate pages 72-75 of my expert report (annexed as Exhibit A to the Person declaration), relating to discounting.
Wallace Kuralt's Experience Creating and a Managing Bookstore Chain
50. When I purchased the stock of Intimate, there was only a single bookstore, located in Chapel Hill, NC. During the succeeding years, Intimate bought or opened up an additional 16 bookstores (in NC, SC, Washington, DC and GA), with a maximum of 9 bookstores in existence at any one time.
51. We created expert systems for ordering, receiving and controlling inventory for multiple bookstores, and developed systems for verification of shipments, packing slips and invoices against our ordering records and Red Book prices, and systems for inventorying, storing and displaying the received books; also, we developed know on how to pick and pack books for shipment to our various stores and how to consolidate returns for return to hundreds of publishers (while transferring books from one store to another to avoid unnecessary returns).
52. As a multiple-bookstore (chain) operator, I performed the same functions as defendants' RDC's have been performing, and know the costs and procedures involved from Intimate's standpoint. I know what activities performed at the bookstore level are being picked up by defendants' RDC's (as a cost and space saving to the retail stores, but which costs have to be incurred somewhere in defendants' distribution system without obtaining additional, discriminatory compensation from the Publishers). Our return rate shows we were more profitable customers for the Publishers than defendants.
53. Based on my own experience, I have set forth the facts in my expert report (Exhibit A to the Person declaration) which show that defendants' analysis of RDC costs to defendants and purported cost savings for publishers are fatally flawed, and involve substantial compensation by Publishers (in the 2% RDC allowance, 1% consolidated return RC fee, and freight reimbursement, and various fees and allowances paid to defendants for Publisher deviations from defendants' imposed rules), and probable failure to take the Publishers' costs into account (such as deductions and returns). See my facts and analysis set forth in my expert report (Exhibit A to the Person declaration).
RDC's Were Developed by Defendants to Cure their Respective
Failures to Properly Operate their Bookstore Chains
54. RDC and RC fees and allowances were not created to take functions away from Publishers but to perform functions which were already being performed by Intimate and other independent booksellers, but not being done properly by defendants.
55. Intimate developed a system (within the discount schedule published in the ABA Red Book) in which Intimate was able to control its book inventory, get purchased books out onto the selling floor with no delay after the drop-shipped books were received from the Publisher by Intimate's bookstores; with timely invoice payments; with timely return of returnable books; with low return rates for higher-risk books (i.e., the front list) and a miniscule return rate for back-list books. Intimate was a good customer; defendants were not, and caused Publishers to merge to try to offset the bad practices of defendants.
56. To be a good customer to Publishers (keeping returns low, and selling from the Publishers' backlists) required skilled personnel and a data processing system, with skilled employees working at both a centralized level (to perform ordering, invoice payment management, determination of books to be returned) and at the bookstore level (to receive and check incoming shipments, quickly put newly-received books onto the selling floor; pick and pack books for return; provide information and guidance to customers).
57. Defendants' failure to have qualified employees at the bookstore level caused them to have inventory, invoice-payment and return problems for which they had already received compensation from the Publishers to perform, but had not performed.
58. Defendants then sought compensation from the Publishers to assemble the needed bookstore employees at a centralized level to perform what should have been done at the bookstore level, and the Publishers started paying this additional compensation to the defendants in the form of RDC, RC, ROG, incentive allowances and other compensation, for work which was already being done by Intimate and the other independents without any additional compensation.
59. Defendants found out, however, that their RDC concept still could not deliver the books to the bookstores on time, and get the returned books returned to the Publishers on time, and get their invoices paid on time, and have their transactions with the Publishers work smoothly, with minimum errors. (The errors are being created for the most part by non-qualified employees of defendants.) The additional compensation paid by the Publishers, for the most part, was a waste, and represented additional compensation to defendants for attempting to perform what they should have been performing all along, for the compensation being received by Intimate and the other independents.
60. Defendants may argue that the RDC enables a lower return rate by recycling books from one store to another, but Intimate was already doing this without any return center, and was doing this within the existing Red Book discount structure.
Intimate Continues as a Bookseller Awaiting Injunctive Relief
61. Intimate is unable to operate a bookstore in competition with defendants as long as defendants continue to obtain the discriminatory discounts, payments and other benefits.
62. Intimate has continued its bookselling operations subsequent to closing its chain of bookstores, awaiting injunctive relief to level the playing field, to enable Intimate to resume its bookstore operations.
63. Intimate (under the trade name Past Perfect Antiques & Books) has been selling new books obtained from various smaller publishers and from a wholesaler (Baker & Taylor), and through continuing sales of books (from an inventory of about 8,000 new books which remained after Intimate closed its chain of bookstores), as follows:
New Titles in Stock at The Intimate
Bookshop Area at Past Perfect Suggested
Antiques & Books Author Publisher Year Retail Price
Linus Pauling Goertzel Harper 95 27.50
Pavarotti:My World Pavaroti Crown 95 25
Going the Distance Sheehan Random 96 22
Lucky You Hiaason Knopf 97 24
Winning Can Be Murder Crider St Martins 96 21.95
Primary Colors Anon Random 96 24
Firestorm Barr Putnam 96 22.95
As Time Goes By Walsh Warner 98 25
The Deal Willett Random 96 23
Black Leopard Coien Knopf 96 23
Daddy-O: Iguana Heads and Texas Tales Wade St Martins 95 24.95
Odyssey of a Manchurian Yang Harcourt 96 35
From Bondage Roth St Martins 96 25.95
I'm Losing You Wagner Random 96 23
Infinite Potential Peat Addison 97 25
Crazy River Garment Random 97 27.50
Apocalypse Watch Ludlum Bantam 95 24.95
Moon Music Kellerman Morrow 98 25.50
Finding Moon Hillerman Harper 95 24
Comes Grief Francis Putnam 95 23.95
From Potters Field Cornwell Scribners 95 24
Matarese Countdown Ludlum Bantam 97 27.50
Her Own Rules Bradford Harper 96 24
Lily White Isaacs Harper 96 25
Bag of Bones King Scribners 98 28
In the Beauty of the Lilies Updike Knopf 96 25.95
Laws of Our Fathers Turow Farrar Strauss 96 26.95
Fault Lines Siddons Harper 95 24
Petty: Classic Pinup Art Austin Gramercy 97 19.99
Requiem for the Heartland Cohen, ed Harper 95 19.95
Ten plus Ten Modern Art
Mus Abrams 89 19.98
Masterpieces of Western Am Art Sweeney Crescent 91 19.99
In Their Name Irving, ed Random 95 25
That Dark and Bloody River Eckert Bantam 95 12.95
Judy Garland Fricke Holt 92 35
Beauty & the Beast Willard Harcourt 92 19.95
Battle of Luke & Longnose McClintock Houghton-M 94 14.95
[CONTINUATION OF]
New Titles in Stock at The Intimate
Bookshop Area at Past Perfect Suggested
Antiques & Books Author Publisher Year Retail Price
Shingeviss Van Lan Houghton-M 97 16
White Wave Wolkstein Harcourt 96 16
Kweeks of Kookatumde Peet Houghton-M 85 16
George Washington's Ghost Brown Houghton-M 94 13.95
Left Behind Carrick Houghton-M 88 13.95
Dare You! Mayhew Houghton-M 92 13.95
Mr. Chas and Lisa Sue
Meet the Pandas Lebowitz Knopf 94 15
It's About Time Hopkins Simon&S 93 14
Imperium Katuscinski Knopf 94 24
Planet Dora: Holocaust Beon Harper 97 30
Europe Adrift Newhouse Random 97 27.50
Bitter Waters Andreev-
Khomiakov Harper 97 25
Prospect Before Her Hufton Knopf 96 35
Inheritance Freedman S&S 96 27.50
Four Days of Courage Johnson Macmillan 87 24.95
Fury of the Northmen Marsden St Martins 93 24.95
Painfully Rich Pearson St Martins 95 23.95
Clint Eastwood Schickel Knopf 96 27.50
Eddie Fisher Fisher Pocket 93 22
Crusader Lardner Random 96 25
Fear of 50 Jong Harper 94 24
Senator for Sale Hilton St Martins 95 22.95
Gladstone Jenkins Random 97 35
Jesus, theSon of Man Gibran Knopf 97 14
West of Yesterday, East of Summer Monette St Martins 94 17.95
Telling Things Rosen Harcourt 97 22
Her Blue Body Walker Harcourt 91 24.95
Canto Familiar Soto Harcourt 95 17
63A. Although Intimate has reduced its bookselling operations, it does continue to sell books, and has the trained personnel (Wallace Kuralt and Brenda Kuralt and a former Intimate bookstore manager as an employee), contacts, know-how, experience, assets, equipment (computer in storage), 1990 Mack semi tractor-trailer, forklift, 2 pallet jacks, storage space, history of business transactions (numerous tapes of computer transactions), computer personnel, and computer software capable of running the operations of a single bookstore or a chain of bookstores. At this point, during February, 2002, Intimate has a total inventory of about 2,000 different book titles, all hardcover, new copies, some of which are local in nature (mainly the titles purchased from smaller publishers), and a total inventory of more than 8,000 new books, mostly hardcover. Also, Intimate has 40 book display fixtures designed by Intimate for bookselling which can hold about 20,000 books (500 books per fixture).
64. The only thing preventing Intimate from operating its bookselling business as in the past is the discriminatory pricing which makes continued bookselling in competition with defendants a futile act, as evidenced by Intimate's closures of all of its bookstores, one by one, after defendants came into the market, and the history of more than 50% of all independent general booksellers in the US who have gone out of business since the advent of defendants' superstore openings.
Selling Information to the Publishers
65. Intimate was never offered or given any compensation for providing book sales information to any of the Publishers.
In 1996, Intimate Could Lose No More Than 2-3% of its
Sales without Being Put out of Business
66. Intimate during and prior to 1996, was conservative with its expenses and as a result had few expenses which it could reduct to offset the competition of defendants.
67. Intimate had suffered from a sales decline starting in 1995, and by 1996 sales were down by 40% from their peak in 1994. At this time, during 1996, Intimate could not afford any significant additional sales declines.
68. A loss of 1% to 2% of our sales to B&N and Borders during 1996 represented a loss of gross profit margin amounting to $25,200 to $50,400 (i.e., 2% of $6,000,000 in sales, times .42 average discount). Such loss of sales (and more) did occur in 1996, and caused me to put Intimate out of its existing bookstore businesses. See Exhibit C to Kursh expert report showing net income before taxes of $3,950 for 1995. Intimate had no hope of recovery after fiscal 1996. Of the 22 superstores which opened in competition with Intimate starting in the early 1990's, 17 of them (or 77%) were superstores owned by defendants (not including any mall stores). These 17 superstores (averaging 25,000 square feet each), added more than 450,000 square feet of bookselling space compared to Intimate's total of 65,000 square feet, and was the equivalent to the addition of about 150 mall-size stores (averaging 3,000 square feet each) in a small market area.
69. Also, costs incurred by Intimate in reacting to defendants' superstore competition amounted to more than several million dollars, including closing costs and distress sales of merchandise.
70. Intimate was forced to discount its books, at a cost to Intimate of $5,692,511 (see exhibit to my expert report).
71. Intimate suffered loss of sales and related gross profit margin (see my expert report).
72. Intimate lost $4,000,000 in store and equipment (costs of construction of 11 stores, 75,000 square feet estimated at $40 per square foot and upfit finishing charges, total of $3,000,000; custom fixtures at $12 per square foot, total of about $900,000; and $100,000 for equipment losses.
73. Intimate lost $500,000 in forced lease settlements between 1995 and 1998, because of Intimate store closings.
74. Intimate lost the costs incurred in programming its computer and maintaining computer records on book transactions, at an estimated cost of more than $1,000,000.
75. Intimate was put out of business, with a destruction of the value of its business (see expert reports of Sam Kursh and Chris Campos).
Increases in Retail Price of Books Resulting from Defendants' Activities
76. As defendants were expanding their superstores, and increasing the costs to Publishers, the Publishers were trying to recapture some of these costs by increasing the suggested retail prices of new books. Average hardcover book prices rose 50%, as shown by the NPD report of annual unit sales from 1991-1998. Also, I confirmed this increase in price by comparing bestseller prices over the period 1970 to 1998.
77. Publishers were put under financial pressure by defendants' activities and were required to merge, resulting in a loss of independence of hundreds of publishers, with the result that 2 of the largest publishers in the United States are foreign owned (BDD - including Random House, Doubleday, Bantam and Dell; and Pearson - including Putnam, Penguin and Viking); thousands of
independent booksellers such as Intimate were driven out of business; and the public wound up paying substantially higher prices for books.
Red Book Freight Policy for the 14 Publishers
78. After 1975, all mass market paperbacks were drop shipped by the Publishers to Intimate on a freight-free basis. Everything else generally was drop-shipped to Intimate where Intimate paid the freight. Only in special deals for hardcover books were Publishers offering to pick up the freight expense. During the late 1990's, the Publishers started picking up the freight expense on drop shipments to booksellers.
79. The RDC terms under which defendants are obtaining their RDC and RC allowances also are providing book shipments to defendants with freight paid by most of the Publishers, which is another discriminatory payment to defendants. Until several years ago, none of the Publishers (except Harper Collins) paid or offered to pay the freight on drop shipments of books by them to Intimate (in absence of publicly-offered special deals and stock offers). Harper Collins paid freight (UPS only) for all drop shipments to booksellers exceeding $200.
B&N's Rent Expense - More than Two Times Intimate's on Square Foot Basis
80. I am familiar with commercial rentals and can estimate the amount of space in a building. I did this with B&N's new superstores in Raleigh, Charlotte, and Chapel Hill and determined they were about 25,000 sq. ft. each. B&N's 10-Q (Quarterly) filing with the SEC during 1996 indicated that they were paying about $20 per sq. ft. (or about $500,000 per store, for their average store of 25,000 sq. ft.). Intimate was paying less than $10 per sq. ft. on the average (with one exception, a small mall store). Intimate was not able to pay rent at this rate for its stores (with the one exception, which was mainly a percentage lease).
81. Putnam Berkley ("Putnam") refused to sell books to Intimate in approximately 1992, and Intimate resolved this problem and resumed buying directly from Putnamin 1994. Meanwhile, Intimate obtained whatever Putnam books it needed from a wholesaler.
82. Plaintiff continued to buy books into 1966 (Intimate's last year of major book purchasing) and 1967; and the loss of credit from some of the Publishers was as a result of Intimate's weakening financial position, resulting from the defendants' alleged activities of obtaining substantially higher effective discounts from the Publishers and using such money to take away Intimate's customers by offering higher discounts to consumers, and higher quality of bookselling services, including a much larger selection of titles, free parking, free reading, coffee and snack areas, public meeting areas, more expensive ambiance, more advertising (especially for openings), public restrooms and huge facilities with room for more offerings as well as more space for customers.
82. As to the 1992 fire loss, Intimate received full repayment for its loss from the insurance carrier, which covered all of the loss. Payment did take 1-1/2 years to obtain, but Intimate was able to pay its bills without interruption by selling the real estate to WKuralt and BKuralt which enabled them to obtain a loan to rebuild the bookstore. The bookstore was back in business in 14 months, including a rebuilt building. Intimate even received insurance proceeds for business interruption (i.e., the loss of Intimate's gross profits). The fire was not a financial disaster for Intimate. Even though the fire destroyed Intimate's central data processing, Intimate had its data processing system up and running in one week. The carrier refused to cover the overtime paid to Intimate's employees (who worked 16 hours a day for two weeks because of the fire), stating that if Intimate had hired other persons to do the same restoration work Intimate would have collected for that as well.
83. During 1993, Intimate did not have significant delays in payment. Intimate wanted to expand with more inventory and went to Random House and made a deal that if Random House shipped all the books Intimate wanted, Intimate would pay within the regular dating terms, and if not Intimate promised to pay interest on any delayed payment. Intimate paid on time and made no interest payments.
84. Intimate's data processing system was more advanced than Baker & Taylor during 1986 and the networks were not good enough for accurate ordering, and we continued printing out Intimate's orders and sending them by Federal Express to the Publishers. The Publishers' systems through the early 1990's failed to use check digit techniques with ISBN book numbers (which Intimate was using to prevent ordering errors), so Intimate chose not to get involved with electronic ordering until the Publishers changed their software to inhibit ordering errors. Defendants plunged into electronic ordering and because of the poor state of the electronic ordering system, created many ordering errors with resulting higher costs for the Publishers which injured them badly from a financial standpoint. By the time these software problems had been corrected, during the mid-1990's, Intimate was fighting for survival and could not make use of any electronic ordering opportunities, and none was offered to Intimate in any event. Because of the rate of ordering errors, and the costs entailed by the Publishers to cure them, the 1% electronic ordering discount paid to defendants was not cost justified from the Publishers' standpoint.
85. Intimate's auditors always pointed out what they perceived as accountants as "management problems" and did so for many years. In spite of such perceived problems by Intimate's accountants, Intimate was growing and maintaining market share, until defendants opened up their superstores in competition with Intimate.
86. Intimate's bookstores were categorized in the industry as "general trade bookstores" meaning that the store sold mainly books of a general nature, as distinguished from specializing in text books or highly specialized books; as a general trade bookstore of significant size Intimate created different types of book areas such as for children, juvenile, fiction, non-fiction, reference, paperbacks. The small mall stores of defendants had substantially fewer titles and less depth (i.e., number of copies per title) than Intimate; whereas defendants' superstores carried substantially more titles and somewhere in their organization had more depth (although often not readily available to put out onto the selling floor). Defendants' superstores and Intimate's bookstores carried all New York Times bestsellers, non-fiction and fiction, hardcover and paperback. Over the years I observed that defendants' mall-size bookstores did not carry a full line of bestsellers. All bookstores, I have observed, do attempt to carry some books of local interest. Intimate carried about 40,000-50,000 titles in each store; defendants claim they have about 175,000 titles (in their annual report); and the mall-size stores carried about 12,000 titles, based on my observation. You can estimate the number of titles by the number and size of book display fixtures. Each fixture of the size used by Intimate could display about 500 books, and there would have to be an adjustment to reflect the depth of the displayed nventory. Intimate layed its racks out in angles, somewhat scientifically, with adjacent rows catering to women, men or children, and we separated our paperbacks out from hardcover because the customers differed (and Intimate therefore had more books per shelf with this type of display). Defendants' superstores mixed paperbacks and hardcovers and therefore got about 20%-30% less display space with their mixed shelving arrangement.
Executed this 17th day of January, 2002, at Carrboro, North Carolina.
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Wallace H. Kuralt